Why have a shareholders' agreement?

[eteb3]

This is a really basic question, I'm sure, but...

Why have a shareholders' agreement when the company also has articles? Why not put the agreement in the articles?

 

[Higgsy]

Biggest mistake I’ve made in business is not having a full shareholders agreement. Doesn’t seem worth it, until there is a dispute.

 

[The Resolver]

The Articles are public (seen on the Companies House website) whereas the SHA is not. You may have internal provisions you do not wish the public, employees, trading partners, to see (eg risks for directors in 'bad leaver' clauses, or provisions facilitating share sales that can give advantage to potential buyers etc) .

The Articles can be amended without the agreement of shareholders with 25% or less whereas the SHA needs 100% approval to future amendments.

Company decisions reached/action taken in breach of the Articles do not necessarily become invalid or capable of being overturned since they are not contractual breaches whereas breaches of a SHA are simple breaches of contract making it not only easier to enforce but allowing consequential damages to be sought (not possible for action in breach of Articles).

As to the general foolishness in not having a Shareholders Agreement at all see here.

 

[eteb3]

Thank you. Interesting on breaches of articles not being contractual breaches.

Presumably anyone can be party to the agreement if everyone's happy with that? So directors can be brought into the agreement even if not shareholders?

 

[Newchodge]

Thank you. Interesting on breaches of articles not being contractual breaches.

Presumably anyone can be party to the agreement if everyone's happy with that? So directors can be brought into the agreement even if not shareholders?

If the directors are not shareholders, the shareholders' agreement is nothing to do with them. Their rights and obligations would be in their employment contracts, usually.

 

[eteb3]

Sorry for the unclarity.

Yes, you're right: obviously it would be a misnomer to call it a "shareholders' agreement" if it includes non-shareholders.

I was aiming at the principle of whether anyone else can be brought into the contract* -- along the lines of an unincorporated association, where any class of member is possible, on any terms you like.

Eg, for a case where non-shareholder directors aren't employed, but you want to have the sort of nuanced, private agreement that The Resolver mentions. You might want the directors liable in contract to the shareholders as such, and not liable to the company for breach of duty.

*ie, the contract that in most cases includes only shareholders but in the one I envisage, also includes non-shareholder directors

 

[Mark T Jones]

Outside of the lethal context, the real value of a shareholder or director agreement (or any other negotiated contract) lies in the discussions that go into agreeing terms and content.

This forum is awash from postings from friends who cheerfully went into business together only to find out months or years later that their expectations are completely different

 

[The Resolver]

The title given to an Agreement is not usually significant and so a document with that name can include non-shareholders ( although there would have to be some separate value/consideration given by the shareholders to the non-shareholder, which of course could be the appointment as a director and the benefits that go with it . It is, however, very unwise from the shareholders perspective for the reason given by eteb3, i.e. that they would become personally liable for any breach by them of the rights of the director signatory. (unless, of course, a clause in it clearly prevents it. )

 

[Higgsy]

Outside of the lethal context, the real value of a shareholder or director agreement (or any other negotiated contract) lies in the discussions that go into agreeing terms and content.

This forum is awash from postings from friends who cheerfully went into business together only to find out months or years later that their expectations are completely different

I had that exact problem, my Ex Business partner wanted a retirement fund (they were older than me), I wanted a profitable business... Didn't realise they wanted me to fund their retirement...

One of my first lessons in business, have a shareholders agreement, easier to make one at the start, than to battle through expensive disputes later.